EU banks and emerging market equities: How can investors play the sagging dollar?

The U.S. dollar in 2025 is noticeably losing ground against other key currencies: the Bloomberg Dollar Spot Index, which reflects the value of the dollar against a basket of ten leading world currencies, has slipped by almost 11% in the first six months. This was the worst result for the first half of the year since 1973.

Bloomberg has gathered the opinions of five portfolio managers and strategists on how to turn a weakening dollar into an investment opportunity. For those who want to implement these ideas through exchange-traded funds (ETFs), Bloomberg Intelligence analysts have offered tools that can serve as rough analogs to the experts' strategies.

The US dollar has entered a phase of a long-term bear market that could last three to five years, according to Marko Papich, chief strategist at BCA Research. In his view, the Trump administration does have the ability to reduce the trade deficit. However, it may also reduce capital inflows into the US, which will hit investment-dependent companies, slow economic growth and weaken the dollar, the strategist adds.

To capitalize on the weakening dollar, Papich advises investors to hold assets outside the US. According to him, China has the greatest growth potential, but the risk there is extremely high. He also bets on Europe, especially the financial sector and telecommunications, where he believes there will be a lot of mergers and acquisitions.

"Everything related to domestic consumption in Europe should benefit, as European economies will boost growth on the back of a reduction in the twin [budget and trade balance] deficits of the US," the expert said.

Analysts at Bloomberg Intelligence have identified several ETF funds that fit Papich's strategy. These are the Vanguard FTSE Europe ETF, which offers broad exposure to European companies, including the financial sector; the iShares MSCI Europe Financials ETF, covering Europe's banking, insurance, real estate and diversified financial services sectors; and the iShares MSCI China ETF, which provides diversified exposure to Chinese companies based on liquidity and market capitalization.

The growing budget deficit undermines confidence in the dollar as a "safe haven", and political instability is forcing investors to change the structure of investments, says the chief market strategist at New York Life Investments Lauren Goodwin. According to her, any sales of U.S. assets and the exchange of dollars for other currencies will only increase pressure on the dollar.

However, U.S. companies with foreign income could benefit from this, the expert emphasizes. According to her, the U.S. currency drawdown creates for such companies a profit on the exchange rate difference, increasing the reporting indicators and the value of shares. However, she warned that investors should still partially hedge currency risks: despite the current pressure, unexpected events could push the dollar to recovery.

Bloomberg notes that there is no direct ETF under Goodwin's strategy of prioritizing U.S. companies with overseas earnings. However, as approximate solutions, one could consider the iShares S&P 100 ETF, where a significant portion of companies' revenue comes from abroad, or the even narrower iShares Top 20 US Stocks ETF, the agency suggested.

Dollar cycles typically last seven to nine years, and the bull market has been going on for more than a decade, notes Loomis, Sayles & Co portfolio manager and strategist Andrea DiCenzo. The dollar was overvalued by about 15% at the start of the year, she says, but then the spot dollar index DXY fell 7%. The analyst expects DXY to fall another 5-6%.

In this environment, DiCenzo sees an opportunity to profit through European and emerging market equities. While the U.S. is now beginning to behave like an emerging market, many emerging markets, by contrast, are demonstrating fiscal discipline and central bank resolve. The strategist also sees prospects in the debt segment, from dollar bonds in Ghana, Kenya and Ecuador to government bonds in local currencies, which offer not only high yields but also the opportunity to capitalize on currency appreciation. On the currency market, she believes that Eastern European currencies - Romania, Poland, Hungary - as well as more niche areas like Nigeria and Egypt, which can continue to grow and remain relatively insulated from Washington's influence, look favorable.

ETF solutions for such a strategy are limited: there is no direct access to frontier markets like Ghana, Kenya and Ecuador, but an alternative is the Vanguard Emerging Markets Government Bond ETF, which invests in sovereign dollar-denominated emerging market bonds at low costs (0.18%), according to Bloomberg. For those willing to take more risk for the sake of higher yields, there are options in emerging market corporate bonds - the VanEck Emerging Markets High Yield Bond ETF with expenses of 0.4% and the iSharesJ.P. Morgan EM Corporate Bond ETF with 0.5%, the agency added.

The dollar's weakening is a consequence of lower expectations for U.S. economic growth, not the rest of the world catching up with America, says Jack Janasijevic, chief portfolio strategist at Natixis Investment Managers Solutions. According to him, the dollar looks oversold now, but it could strengthen by 2026.

While the U.S. currency has sagged, he advises betting on emerging market stocks. The weakening dollar creates a favorable background for them, and local central banks retain room to cut rates, which will be an additional stimulus to growth as their currencies strengthen, the strategist notes. Janasijevic said he recently increased his exposure to Chinese securities: even in the face of a protracted trade war, China is able to support its stock market, something other emerging economies do not have. According to him, in the worst case China will hold the market, and in the best case - both economies will win, so the risk-return ratio looks convincing.

Among EFT funds suitable for this strategy, the Bloomberg Intelligence strategist singled out Technology Select Sector SPDR Fund and Vanguard Information Technology ETF with low costs (0.08% and 0.09%). For risk takers, he noted the more concentrated Roundhill Magnificent Seven ETF with a 0.29% fee.

"Our bearish view on the dollar, which has persisted over the past 12 months, remains in place," emphasized Christine Campmani, senior portfolio manager for macro strategies at Invesco.

Against this background, she advises investors to diversify into international bonds. Among developed markets, Kampmani singled out Australia and the UK as countries with high rates and attractive yields, and in the emerging markets segment, bonds from Brazil and India.

"We prefer to hold currencies from both emerging and developed countries. We particularly like the euro, yen, Brazilian real and Mexican peso - the latter two currencies offer higher yields. Volatility in currency markets is currently underestimated. We prefer to buy currency options: it allows us to win on rate movements with limited losses in the amount of the premium paid," Kampmani added.

Now investors can not get through ETFs access to bonds of developed countries in their national currencies - most funds are focused on dollar securities, which makes it impossible to implement the strategy proposed by Christine Campmani, notes Bloomberg. But there are such instruments in the segment of emerging markets. For example, SPDR Bloomberg Emerging Markets Local Bond ETF and VanEck J.P. Morgan EM Local Currency Bond ETF with costs of 0.3% allow investing in bonds of China, India, Mexico and Brazil in their national currencies, the agency pointed out.

When asked about more personal ways to capitalize on the weak dollar, experts' answers ranged from booking trips to Canada to "enjoy the last moments of dollar strength" and buying a home in a country with a devalued currency, such as Argentina - to buying cases of French wine.

This article was AI-translated and verified by a human editor